Analysis of Value Relevance and Foreign Investment Impact of

School: Abraham Baldwin Agricultural College - Course: BUSA 3060 - Subject: Accounting

Reading Homework Assignment: DeFond (2019) Questions Directions For this week's reading homework assignment, you will use this document to answer questions about this module's assigned reading. Questions 1.What accounts for the fact that accounting information is so much more useful (in other words, value relevant) in some countries than in others? Value relevance captures the association between annual stock returns and the change in a company's accounting profitability.The notion is that the higher the relative variation in stock returns on the earnings announcement days, the greater the amount of information conveyed to investors by those earnings. In some countries, like the U.S., for example, stock prices have a relatively large reaction to the earnings announcements, while in countries like Italy there is much less of a reaction.Accounting earnings helps investors make efficient resource allocation decisions differs across countries. 2.What circumstances dampened the increase in the magnitude of foreign mutual fund investment in companies following the mandatory adoption of IFRS? Companies that experienced the greatest increase in disclosure under IFRS had the largest increase in foreign mutual fund ownership. The more information that the accounting numbers disclose, the more foreigners were willing to invest. Thus, one interference from this study as at the increase disclosure is a characteristic that makes accounting matter to investors.However, the magnitude of the increase in investment it is not as high as it was for voluntary adopters. While virtually all interior doctors experience an increase in foreign investment, only a select group of mandatory adopters benefit at all from IFRS adoption. 3.What does the author report regarding earnings pay-performance sensitivity after mandatory IFRS adoption?

According to the authors, the effects of IFRS's fair value-oriented provisions vary differently across companies.Firms that are least affected by IFRS fair value provisions, the pay-performance sensitivity goes up.In other words, mandatory I FRS adoption makes accounting earnings more useful in evaluating management performance for purposes of awarding cash bonuses.Firms that are affected by IFRS fair value provisions, the pay-performance sensitivity declines. 4.Why did the mandatory adoption of IFRS in 2005 in 52 countries around the world present a unique opportunity for researchers to explore the qualitative characteristics that make accounting information "matter?" Researchers were presented width an opportunity to gather data from a quasi-natural experiment.The nature of these markets mattered, not the nature of the accounting.A much stronger research design is to have a exogeneous event or shock that changes the accounting. It enabled accounting researchers to investigate in detail at dozens of countries and thousands of companies to investigate what makes accounting important.